Ten propositions on climate change and growth

Simon Maxwell

The impact of climate change on growth, and vice-versa, the impact of growth on climate

change, are both much-debated. Growth optimists argue that green growth options will

make it possible to continue growing while simultaneously avoiding the warming of the

planet. Growth pessimists argue the opposite – and sometimes add that we anyway

consume too much, and could be happier with lower growth.

From the perspective of developing countries, especially the poorer developing countries,

continued growth looks like an imperative if the Millennium Development Goals and their

post-2015 successors are to be met. The main concern of developing countries is that

climate change, or measures taken to combat climate change, might dampen growth.

Equally, however, it does not take much for fast-growing developing countries to begin

contributing to climate change in their own right. For example, manufacturing in Vietnam is

growing at 10% a year, which puts it on a trajectory to grow eight times in the next twenty

years – but the country is already emitting 1.3t of CO2 p.a., more than half way to the 2050

target ceiling.

Much of the current debate focuses on mitigation and adaptation, both important

components of climate-related policy. In the CDKN, we add a third dimension, development,

and talk about ‘climate compatible development’, defined as development that minimises

the harm caused by climate impacts, while maximising the many human development

opportunities presented by a low emissions, more resilient future. See Figure 11.

1 http://cdkn.preprod.headshift.com/wp-content/uploads/2011/02/CDKN-CCD-DIGI-MASTER-19NOV.pdf

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From that position, here are ten propositions about climate change and growth.

1. Growth does matter for poor countries – even though most poverty is not in the

poorest countries

It is self-evident that very poor countries with very high levels of poverty will need to grow,

if basic human needs are to be met. Take Burundi, where 81% of the population lives on less

than $US 1.25 a day, and where national per capita income is only $US 1.04 per day. No

redistribution from rich to poor within the country could eliminate poverty.

That is an extreme example, and it is notable that 72% of the poor now live in what are

formally described as middle income countries, including China, India, Nigeria and Pakistan.

Do those countries need to grow, or could they solve the poverty problem through

redistribution? Martin Ravallion at the World Bank has explored this question2, and

concludes that ‘the marginal tax rates (MTRs) needed to fill the poverty gap for the

international poverty line of $1.25 a day are clearly prohibitive (marginal tax rates of 100%

or more) for the majority of countries with consumption per capita under $2,000 per year at

2005 PPP. Even covering half the poverty gap would require prohibitive MTRs in the

majority of poor countries. Yet amongst better-off developing countries—over $4,000 per

year (say)—the marginal tax rates needed for substantial pro-poor redistribution are very

small—less than 1% on average, and under 6% in all cases.’

According to the figures published in the World Development Report for 2010, 35 or so

countries had per capita income of below $US 2000, including Bangladesh, Cambodia, Haiti,

and many countries in Africa; and about 20 lay between $US 2000 and $US 4000, including

India, Indonesia and Pakistan. For all these countries, accounting for the bulk of the world’s

poor, there should be no doubt that growth is a priority.

China and some others lie above the $US 4000 threshold, but for all countries, reducing core

poverty is only the first step on the development path. Convergence with rich countries

makes quite other demands, and raises other questions, to which we shall come.

2

http://elibrary.worldbank.org/docserver/download/5046.pdf?expires=1301493327&id=id&accname=guest&c

hecksum=6A4ADAEC776E2B51F7980DB94A3EB8B0

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2. Climate change is one driver, but the measures taken to tackle climate change will

also have effects on growth

Climate change will impact directly on growth, as the Stern Report, the IPCC, and many

other reviews have concluded. Most of the impacts will be negative. Heat and water

stress will affect crop productivity. Glacier melt will reduce the potential for irrigation.

Extreme climatic events will disrupt livelihoods and damage productive infrastructure. One

rule-of-thumb estimate is that each 1 degree rise in temperature above the optimum during

the growing season leads to a 10% decline in grain yields.

At the same time, measures taken to tackle climate change will also have an effect on

growth, at least in the short run. A carbon tax, for example, would increase production and

transport costs, and could result in an increase in prices, reducing demand and real income.

Karen Ellis and colleagues have looked systematically at the effects of mitigation policies in

developed countries on developing countries. They cover such topics as carbon taxes,

border tax adjustments, emissions trading schemes, carbon labelling, and financial flows

associated with the Clean Development Mechanism. A summary of likely impacts on trade,

capital flows, development finance, technology and growth is in Appendix 1. There are

complex inter-linkages and variegated patterns of winners and losers.

3. A global perspective is needed

An important insight of work on climate compatible development is that the drivers of

climate change impacts on growth are external as well as internal, and may be positive as

well as negative. The oil price example above illustrates the point: a carbon tax in developed

countries has direct impacts on developing countries. The current global food price crisis

provides another example. Simplifying somewhat, fires in Russia and floods in Australia,

combined with the use of 100mt of corn for biofuels in the US, have contributed to world

record food prices, which affect welfare, political stability and growth prospects around the

world.

Thus, discussion of mitigation and adaptation policies conducted in a national context is

misleading.

Furthermore, climate change creates opportunities as well as threats. Two examples are

lithium in Bolivia and solar cell production in China.

Bolivia has an estimated 50% of the world’s reserve of lithium, needed for a new generation

of low carbon batteries for electric vehicles, found in brine deposits below the Uyuni salt

4

flats. The Government has valued these at $US 1.8 tn, and has plans to use the resource as

the basis for development of battery and other downstream manufacturing.

China has developed a large solar cell industry, largely for export. China itself has installed

capacity of about 220 MW, but one firm alone, Renesola, produced more than 1 GW in 2010

alone, entirely for export. This is a $US 1bn business, contributing jobs, tax revenues, and

foreign exchange to the Chinese economy.

These negative and positive cases illustrate the way in which climate change and climate-

related policy will (a) shift production possibility frontiers which determine what outputs

can be produced with what inputs, (b) change relative prices, and (c) create entirely new

markets. It may be too strong to say that global production will be restructured, but the

impacts are likely to be significant.

4. A climate compatible strategy needs to be at the heart of the response

Four conclusions follow from the previous discussion. First, climate change will change

development options and pathways. Second, adjustment is likely to be disruptive, with

winners and losers as between sectors, geographies, genders and generations. Third, a focus

on mitigation and adaptation alone is unlikely to encompass the range of likely effects. And

fourth, some kind of national strategy is necessary to manage change on the scale expected.

National strategies can be problematic. The current generation of climate-related plans are

heir to a long tradition of national plans, ranging from the top down and strongly

interventionist, to the lighter touch and more strategic. Examples include national

development plans, like those found in India or China, integrated rural development

programmes, food security strategies and plans, sustainable development strategies,

structural adjustment programmes, poverty assessments and poverty reduction strategy

papers, and MDG plans of action.

In the worst case, national strategies have been data-hungry, time-consuming to prepare,

top-down in nature, often with analysis disconnected from action, and, where action is

foreseen, inflexible. They have also often been vehicles for the interests of one Ministry or

sector within Government, at the expense of others. They have consisted of a list of projects

for donor funding, rather than addressing the incentive and regulatory framework. And

private sector and civil society actors have been excluded. The worst case is sometimes

described as ‘blueprint planning’

In the best cases, national development planning has been an open, participatory and

flexible process, led from the centre, starting with objectives, addressing both the

5

regulatory framework and public expenditure, subject to flexible implementation, and with

frequent monitoring and re-planning. It sometimes uses scenario planning, as a tool both to

explore options, but also to build consensus. The best case is sometimes described as

‘process planning’, drawing more recently on the lessons of complexity theory.

Note that the style of plan is independent of the content. It would be easy but misleading to

characterise blueprint plans as necessarily being associated with state-led, top-down

development, and process plans as being associated with market-led options. Sadly, many

market-friendly Governments have fallen into the trap of blueprint planning.

Climate change planning has so far concentrated on two documents mandated by the

UNFCCC: for mitigation, the NAMA, or Nationally Appropriate Mitigation Actions; for

Adaptation, the NAPA, or National Adaptation Programme of Action. These have begun to

be superseded at national level by more comprehensive documents, like Low Carbon

Development Plans, Low Carbon Growth Plans, or Climate Compatible Development Plans.

In principle, these have the potential to deal with the wider development agenda.

There are too few of the new generation plans to reach unambiguous judgements about

their quality. What, however, in terms of growth, should they aspire to achieve?

5. Low carbon growth appears feasible

From the previous discussion, low carbon – or green – growth is not the only aspect of a

new growth policy, which needs to deal with a range of climate-induced shifts to input-

output relationships, relative prices and market opportunities. Nevertheless, though not

sufficient, low carbon growth is a necessary aspect, as illustrated by the Vietnam example

cited earlier.

Pessimists argue that the lower energy efficiency of non-fossil fuels will inevitably slow

growth3. Indeed, more generally, estimates from the Stern report that tackling climate

change will cost 1% of GDP also imply that growth will need to be sacrificed. Stern has

increased his estimate to 2%4. With specific reference to energy, the argument is that

increases in energy efficiency or ‘energy productivity’5 will be insufficient to offset higher

costs, and that this will constrain growth.

3 See, for example, the work of Hannes Kunz (http://www.theoildrum.com/node/6641)

4 Stern, N, 2009, A Blueprint for a Safer Planet, Bodley Head, London

5 http://www.mckinsey.com/mgi/publications/global_energy_demand/Energy_Productivity.asp

6

A practical insight is provided by recent analysis of the impact of rising oil prices. Dirk Willem

te Velde6 examines the impact of a one third increase in oil prices over two years. This is a

larger increase, and more sudden, than could be expected as a result of carbon pricing.

Nevertheless, it would cut 1% from global GDP and cost sub-Saharan Africa $US 8bn, with

the bulk of the costs, and the biggest proportional GDP losses, suffered by some of the

poorest countries: Ghana, Swaziland, Lesotho and Togo all lose more than 3% of GDP, as do

Honduras and Nicaragua. Poor households suffer most. Of course, oil exporters gain from a

general increase in the oil price.

In contrast, green growth optimists argue that low carbon options will boost growth in both

the short- and long-terms, leading to immediate resource savings and job creation in the

short term, and to the creation of competitive advantage in the longer term.

Dirk Willem te Velde is among those who argued for a (part) green fiscal stimulus during

global financial crisis, partly to encourage energy efficiency. He reported that

‘Preliminary research suggests that productive firms tend to be more

energy efficient, so private sector development policies that promote

productivity growth can also promote greener growth. Support for the

adoption of green technology can help to narrow the energy efficiency gap

between the actual energy savings and energy savings that are

economically and socially efficient.’7

More generally, the Green New Deal Group argued in 2008 for a package of measures in the

UK, including:

• ‘Executing a bold new vision for a low-carbon energy system that will include making ‘every building a power station’. Involving tens of millions of properties, their energy efficiency will be maximised, as will the use of renewables to generate electricity.

• Creating and training a ‘carbon army’ of workers to provide the human resources for a vast environmental reconstruction programme.

• Ensuring more realistic fossil fuel prices that include the cost to the environment, and are high enough to tackle climate change effectively by creating the economic incentive to drive efficiency and bring alternative fuels to market.

6

http://blogs.odi.org.uk/blogs/main/archive/2011/03/16/oil_prices_poor_countries_africa_shocks_vulnerabiliti

es.aspx

7 http://www.odi.org.uk/resources/download/2863.pdf

7

• Developing a wide-ranging package of other financial innovations and incentives to assemble the tens of billions of pounds that need to be spent.’8

Similar lists are found in many prescriptions for climate-friendly growth, including by

authors such as Thomas Friedman, George Monbiot, Lester Brown and Tim Jackson. Most

recently, UNEP has published its proposals for a green economy, arguing that

‘Perhaps the most widespread myth is that there is an inescapable

trade-off between environmental sustainability and economic

progress. There is now substantial evidence that the “greening” of

economies neither inhibits wealth creation nor employment

opportunities, and that there are many green sectors which show

significant opportunities for investment and related growth in wealth

and jobs.’9

The ‘green sectors’ referred to as offering potential for job growth include agriculture,

buildings, forestry, transport, renewable energy, and waste management. For example,

Figure 2 illustrates the total employment potential in the energy sector under a 2% green

investment scenario, illustrating the shift from coal to alternative sectors.

Figure 2

Total employment in the energy sector and its disaggregation into fuel and power,

and energy efficiency under a 2% green investment scenario.

Source: http://www.unep.org/greeneconomy/Portals/88/documents/ger/GER_synthesis_en.pdf

8 http://www.neweconomics.org/sites/neweconomics.org/files/A_Green_New_Deal_1.pdf

9 http://www.unep.org/greeneconomy/Portals/88/documents/ger/GER_synthesis_en.pdf

8

The UNEP modelling does not make allowance for the growth of nuclear power, but it is

worth noting that many countries are likely to consider this option, despite temporary

hesitations caused by the post-tsunami difficulties at the Fukushima facility in Japan.

A final example comes from work on scaling up low carbon infrastructure investments in

developing countries, carried out by the World Economic Forum10. In one stream of work,

the objective was to investigate how South Africa might finance renewable generating

capacity of 20GW by 2020. The case was made not on environmental grounds alone, but

equally in terms of employment creation, export potential and energy security. For example,

up to 50,000 jobs could be created if renewables accounted for 15% of total energy

production. Greening the economy was presented as an industrial policy just as much as a

climate policy.

Nick Stern is unambiguous in his conclusion: ‘low carbon growth can be a reality if we so

wish’ (ibid: 46).

6. Get overall policy right: the need for a flexible and competitive economy

The first approach to policy for low carbon growth is that an economy must be equipped for

growth in a rapidly changing global economy. This is always true, and growth policies need

to recognise that technologies and institutions can change economic prospects very quickly.

Climate change and climate change policy simply add further elements.

What ‘equipped for growth’ means is an open question. The Commission on Growth and

Development has concluded that there are no recipes for growth, only ingredients,

summarising these in a diagram reproduced as Figure 3. Macro-economic stability,

openness, market allocation, leadership, and ‘future orientation’ are all key factors. The

Commission for Africa took a similarly eclectic view.

10

http://www3.weforum.org/docs/WEF_EI_CriticalMass_Report_2011.pdf

9

Figure 3

The Common Characteristics of High, Sustained Growth

In practical terms, one way to judge whether countries have the characteristics required for

high and sustained growth is to make use of the World Economic Forum Competitiveness

Index. This offers a way of scoring and ranking countries at different levels of development,

analysing 12 pillars of competitiveness, weighted differently for different kinds of economy,

as in Figure 4. The pillars are broadly consistent with the Growth Commission. The scoring

and ranking leads to a wide spread of performance. In 2011, Switzerland and Sweden

ranked at the top, Chad and Angola at the bottom11.

11

http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2010-11.pdf

10

Figure 4

The 12 pillars of competitiveness

Inevitably, poor countries score poorly on the Competitiveness Index compared to rich

countries. However, some score better or worse than others at comparable levels of

development. Figure 5 shows the CI score for a range of DFID’s priority countries, showing

that most score poorly. More interestingly, Figure 6 shows CI performance relative to the

Figure 5

countries’ Human Development Index. India, Rwanda, South Africa and some others score

relatively well for their level of HDI, whereas Pakistan, Nigeria and Ghana, among others,

score relatively poorly. This may indicate where the priorities are for donor engagement.

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Figure 6

ODI and KPMG are developing an alternative way of analysing readiness for change, using a

Capability Index. This is work in progress, but the model is summarised in Figure 7. A clear

distinction is made between economic, social and institutional capabilities

Figure 7

The dimensions of Capability

Whatever measure is used, it is clear that growth can be accelerated with the right mix of

policies and public expenditure programmes. If climate change challenges current growth

models, it is all the more important to invest in readiness. But there is more: climate policies

themselves also shape growth.

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7. Link climate policies to growth

The ODI study referred to earlier looked at the impact of developed country mitigation

policies on developing countries, concentrating on trade-related measures. Developing

country Governments will be choosing policies from a wider set, a first listing of which is to

be found in Figure 8. This distinguishes policies related to the incentive and regulatory

framework from those concerned with public expenditure, and national policies from

international. Countries can choose different combinations of policies, as the examples of

the UK and Indonesia illustrate (Box 1).

Figure 8

Climate-related policies for Climate Compatible Development

National International

Incentive and regulatory framework

Climate Change Act

Independent Climate Change Commission

Low carbon transmission plan or roadmap

National cap and trade

Carbon tax

Portfolio regulation of energy companies

Targeted tax incentives for private sector R and D

Regulate emissions from vehicles

Regulate other emissions

Strengthen forest law to reduce deforestation

Strengthen planning laws on housing design and location

Decoupling utility profits from gross sales

New post-Kyoto international targets

International cap and trade

International carbon tax

International standards for fuel efficiency and emissions

Extend emissions targets to aviation and shipping

Regulate trade (e.g. in forest products)

New international treaties on water sharing

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Box 1

Climate Change Policy-making in the UK and Indonesia

Climate policy in the UK is shaped by the Climate Act of 2008, which mandates a carbon reduction target for 2050 of 80% compared to 1990. The Act created an independent Committee on Climate Change which advises the Government on emissions targets and progress against them. A UK Low Carbon Transition Plan was published in 2009, setting out how a 30% reduction could be achieved by 2020. It provides for 30% of energy to be renewable by 2020, with accompanying measures in sectors including housing, transport, farming and workplaces. There are provisions for support to new technologies and a commitment to help the most vulnerable through price support and help with grants. The UK is a member of the European Emissions Trading Scheme. A Green Investment Bank will be launched in 2012.

In Indonesia, a series of laws between 1994 and 2009 dealt with ratification of the UN Climate Change Convention and with issues related to energy, water and environmental protection. A series of Presidential Statements and policy papers have set out to mainstream a National Action Plan on Climate Change into the five-year development plan. A National Council on Climate Change has responsibility for climate policy and has supported the preparation of a climate change sectoral roadmap. The objective is to reduce carbon emissions by 26% by 2020, or 41% with international support; and to change the status of forests from net emitter to net carbon sink.

Public expenditure

Increase R and D budget

AMCs for renewable technologies

Subsidise retro-fitting of buildings

Subsidise new technologies (e.g. CCS)

Subsidise renewables at domestic level

Provide subsidies to offset fuel poverty

Extend social protection for vulnerable groups

Invest in strengthening critical infrastructure

Invest in new infrastructure

Subsidise insurance mechanisms

Cut traditional fuel subsidies

Improved extension and entrepreneurial education

Education and consumer benchmarking

Fund N-S technology transfer

Fund S-S cooperation

Extend scope of CDM

Regional risk facilities

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The challenge of decision-making is to choose an efficient, effective and mutually

compatible set of policies from the list of those available. Methods which combine

quantitative and qualitative analysis are likely to result in the use of multi-criteria tables,

with criteria including: scale, speed, cost-effectiveness, administrative feasibility, political

feasibility, and consistency with other policies.

8. The priority for funding is to leverage private flows

An important conclusion from the preceding discussion is that the definition of climate

financing needs to have porous edges, recognising that countries need to be supported in a

wide range of adjustments to changing global economic circumstances, some of which may

not at first sight seem directly climate-related. As the work by WEF has recognised, climate-

related growth policies have strong links to industrial policy more widely

Many other issues arise in relation to climate finance. The Advisory Group on Finance, which

reported at the end of 2010, was charged with mapping how the $US100 bn of ‘new and

additional’ public and private finance foreseen by the Copenhagen Accord might be raised.

A range of options was identified, summarised in Figure 9. Public sources included direct

budget contributions and a variety of tax-based instruments. Other sources include carbon

markets and private capital.

Figure 9

Sources of climate finance

Source: Advisory Group on Finance

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Monitoring is a major issue, addressed by initiatives like Climate Funds Update12. Not

surprisingly, it proves easier to monitor public funds than private. Beyond monitoring, issues

arise in relation to:

• Additionality – with many possible definitions still being debated, and an increasing

likelihood that little genuinely new money will become available.

• Architecture – especially related to the tension between seeing climate transfers as

entitlements rather than aid, with corresponding implications for governance and

the role of donors.

• Conditionality – with the clear implication that transfer payments should not be

subject to conditions by donors.

• Absorptive capacity – with the lesson from aid funding (and from commodity price

surges) that a sudden inflow of foreign exchange can lead to Dutch disease, which

harms productive sectors, unless additional funding is directed specifically to supply-

side investments.

• Predictability and accountability – especially in relation to the volume and timing of

public flows.

From the perspective of growth, the basic principles of aid effectiveness apply, especially

the importance of country ownership, alignment behind Government plans, harmonisation

of procedures, and mutual accountability. From the perspective of outside funders, a key

pre-condition is the existence of a strong and credible policy framework, described in the

WEF scaling-up report as an ‘investment-grade’ policy framework.

Investment grade policy is also a requirement for private sector engagement, and the

question of how to secure the necessary private investment in low carbon development is

arguably the most important new aspect of the finance debate. The key terms is ‘leverage’ –

concerned with using public money to encourage or ‘crowd-in’ private investment. A ration

of 18:1 is sometimes discussed – meaning that every pound of public money will result in 18

pounds of private investment.

Some of the ways to achieve this are well known. Aid donors are used to making

investments in infrastructure as a way to encourage private investment, and have

experimented with challenge or innovation funds to reduce the risks for business partners.

12

http://www.climatefundsupdate.org/

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Multilateral development banks and Development Finance Institutions are well-versed in

blending grant and loan finance, providing loan guarantees, and using equity stakes in

private business as a kind of quality guarantee for other investors. Newer instruments

involve hedging foreign exchange or regulatory risk, so as to reduce the perceived

disincentives to doing business in developing countries.

It is important to emphasise that the private finance to be attracted into low carbon growth

will be national as well as international, involving small and large businesses in developing

countries themselves. That is why countries such as the UK are exploring the value of a

domestic Green Bank, to specialise in this area.

9. Invest in the politics of climate compatible development

The penultimate challenge is how to secure a strong and credible policy framework. The

problem is that climate policy needs to provide long-term stability and predictability, in a

political environment in which policy choices are contested and political systems provide for

regular changes of Government.

A challenge to climate policy-makers is that dealing with climate change needs short-term

action to avoid long-term consequences. Anthony Giddens has formulated this as a paradox.

‘Gidden’s paradox states that since the dangers posed by global warming aren’t tangible,

immediate or visible . . . many will sit on their hands and do nothing . . . yet waiting until

they become visible and acute . . . will, by definition, be too late.’13

As noted, climate change and climate policy create winners and losers on a large scale.

Another paradox, which, to match Giddens might be called ‘Maxwell’s paradox’, is that the

scale of change and the sheer numbers of winners and losers make it most difficult to create

consensus on exactly those climate-related topics where long-term consensus is most

needed.

Various authors have explored the potential for consensus-building. Giddens, for example,

argues for a consensus-based "radicalism of the centre" involving a suspension of hostilities

between rival parties, and for a "concordat" on climate. Colin Challen, argues that "to break

out of this padded cell requires courage. It may, indeed probably will, mean abandoning

tribal loyalties, and risking the approbation of one's political kin...".

13 Anthony Giddens, ‘The politics of climate change’, 2009

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Concretely, Giddens and Challen between them offer a series of options:

Use all-party parliamentary groups to foster discussion and consensus-building.

Aim for consensus on long-term objectives, without focusing at all on detail - as in

Britain's Climate Change Act (2008), which mandates cuts in overall carbon-emissions

without specifying how they are to be achieved.

Set up independent bodies - such as the committee on climate change, created by the

Climate Change Act - to monitor progress in achieving targets and to advise on (but

not yet mandate) the measures.

Require such bodies to help build consensus, for example by consulting all political

parties.

Seek ways to increase the costs of "defection" from the consensus.

Encourage mass movements and civil-society action-groups to agitate for change.

Others add additional ideas. For example, think-tanks play a role in promoting the

development of "epistemic communities" or "communities of practice" to help shape

debate.

In recent work, Stef Raubenheimer has described the role of scenario planning in South

Africa as an exercise in building consensus14. The South African exercise was known as the

LTMS, standing for Long Term Mitigation Scenarios. It was a three-year exercise, involving

stakeholders from many different sectors and a great deal of analysis of alternatives

ranging from’ business-as-usual’ to ‘required-by-science’. It generated radical options for

transformation of the South African economy, approved by the South African Cabinet, an

outcome which seemed highly unlikely at the beginning of the process. The approach is

now being rolled out in various countries in Latin America.

10. Grow - and be happy!

Finally, it is necessary to address the argument that even low carbon growth is

unsustainable – and that neither happiness nor well-being depend on growth. This is an

argument associated with Tim Jackson, whose book ‘Prosperity Without Growth’ makes the

case for the impossibility of long-term growth, but also argues that ever-higher incomes are

not an appropriate measure of progress. He specifically exempts developing countries from

14

Raubenheimer, S, 2011, ‘Facing Climate Change: Building South Africa’s Strategy’, IDASA

18

the argument, for the kinds of reasons laid out earlier in this note, but does emphasise the

relentless impact on natural resource use of growing material consumption, even with

greater energy and resource-use efficiency, aimed at de-coupling growth from raw

materials. Lester Brown takes a similar view in his latest book, though again has poverty

reduction and human development as one of the key legs of his plan to save the planet.

At first sight, global growth does present a very large challenge. As the Global Footprint

Network has shown, based on a range of biocapacity indicators, and not just carbon-related,

it currently takes the earth 1.5 years to regenerate what is used in one year. By 2030, it will

take two earths to sustain consumption. Rapid change is therefore necessary, starting with

the countries that currently consume most – those marked in red or brown in Figure 10.

Figure 10

Source:

http://www.footprintnetwork.org/en/index.php/GFN/page/ecological_debtors_and_creditors/

If developing countries, those coloured various shades of green on the map, are excluded

from the charge of biophysical excess, then the growth they need to achieve minimum

standards of human development - and ‘happiness’ - is certainly ‘permitted’. The problem

is with convergence, and the level of income at which it will take place.

To take a simple example, the average GNI per capita of low income countries in 2008 was

$US 1407 in PPP adjusted terms, and the average GNI of high income countries was $US

37141. If the growth of per capita income in the poorer group were 4% p.a., and in the

richer group 2% p.a., they would eventually converge – in 2180, by which time the per

capita income in both groups would be approx $US 1.2m (in 2008 prices). Clearly, continued

consumption growth at compound rates leads to very high numbers indeed, with implied

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unsustainable impacts on the demand for resources. The income figure at which happiness

is supposed to level off is about $US 20000, so this is 60 times the income apparently

needed.

There is a conundrum here which needs to be solved, principally by developed countries,

but with unavoidable impacts for developing countries. The question is whether developing

countries need to act immediately on some or other set of assumptions about the

stabilisation and reduction of over-consumption in the richer countries. It is probably

dereliction of analytical duty to paraphrase St Augustine, and say ‘yes, but not yet’. For the

time being, poor countries should both grow and be happy.

__________________________

SJM

April 2011

Appendix 1

Effects of mitigation policies (in annex 1 countries) on developing countries: ‘+’ indicates positive effect, ‘-’ indicates negative effect, ‘+/-’ indicates indeterminate effect

Trade Capital Flows Aid/Development Finance Technology Growth

Carbon taxes +

Production and hence

exports to countries with no

carbon taxes (leakage)

-

slower global growth

reducing global trade

opportunities overall

- Higher price of carbon

imports

+ / - shifts in comparative

advantage and knock on

impacts on other economic

sectors transmitted through

changes in real effective

exchange rate

+

Carbon leakage increases

FDI to countries with no

carbon taxes esp. those

with a good investment

climate

-

Less investment in carbon

intensive industries in

mitigating countries

+

If countries with taxes will

allocate revenues from a

carbon tax to developing

countries

+ / -

Depends on overall impact

on FDI and incentives for

low carbon investment

+ / -

Depends on impact on

FDI, technology transfer &

trade patterns

Emission trading

schemes

+

Reduced cost of mitigation

minimises growth sacrificed

+

More investment in

abatement in countries

+

ETS could be implemented

so that a share of

+

More cross border

investment in energy

+

Faster growth through

increased trade, FDI and

21

Similar impacts as

carbon tax plus:

and trade opportunities lost

?

increases in trade in CERs

amongst participating

countries, but affect on other

trade not clear

with low cost abatement

opportunities

proceeds are used as aid

flows to poor countries

efficiency leads to more

technology transfer and

productivity growth

possibly also aid if

revenues are used for that

purpose.

Border tax

adjustment

-

Exporters of products to

sectors affected by emission

targets in developed

countries face loss of export

revenues

-

Lower global growth and

welfare due to increased

protectionist tendencies.

+

Reduced import prices for

affected products in non-

mitigating countries

-

Less carbon leakage

-

Less technology flows

-

Reduced trade, capital

flows and technology

flows leads to lower

growth

22

Carbon labelling + / -

Depends on impact on

competitiveness which in

turn depends on

methodology used for

labelling, carbon intensity of

production, and ability to

obtain certification.

+ / -

A well designed carbon

labelling scheme could

create incentives for

production of different

parts of the supply chain

to move to lower emission

locations, which may be in

developing countries.

High carbon exporters

lose investment.

+

Aid may help cover

certification costs with

knock-on benefits in

other areas

+

Carbon labelling could

increase transfer of

green technologies

+ / -

Depends on impacts on

export opportunities and

technology transfer.

Liberalisation of

environmental

goods and services

+

Lower tariffs generate

welfare gains for importers,

and export opportunities for

exporters. Will lead to more

trade in EGS benefitting

developing countries trading

in EGS

+

EGS liberalisation would

lead to technology

transfer to developing

countries through

increased trade and

developed country

exports

+

EGS liberalisation leads

to faster growth through

new export

opportunities and

spillovers from imports.

REDD+ +

If fungible with carbon

markets, then countries

implementing CERs can sell

credits to countries with

+

Financial inflows (FDI)

used for mitigation, in

those countries able to

deliver forest-sector

+

Development finance, in

those countries able to

deliver forest-sector

+

Technology transfer

through FDI

+

Spillovers from FDI and

financial inflows if used

wisely may stimulate

growth for recipient

23

emission targets, perhaps

through intermediaries

- If high aid inflows results in

Dutch disease may damage

competitiveness of some

economic sectors

emissions reductions emissions reductions

- Through possible

Dutch Disease effects

unless appropriately

managed

countries.

- if generates significant

Dutch Disease

CDM +

Countries implementing CERs

can sell credits to countries

with emission targets,

perhaps through

intermediaries

+

Financial inflows (FDI) to

countries with mitigation

opportunities and good

investment climate.

+

Technology transfer

through FDI

+

Spillovers from FDI

increase growth

Technology

transfer

+

Increased technological

capacities may increase

capacity to export

+

Increased technological

capacities may increase

capacity to export and

hence attract investment.

- mandatory technology

transfer might hamper FDI

+

If aid supports transfer

of energy efficiency

technologies

+

Whether FDI or aid

induced, there will be

more technology flows

+

More technology flows

raise productivity and

growth